Within a company, decentralization exists in various degrees, often reflecting the scope of the decision-making authority given to a particular segment manager. Under this classification scheme, the decentralized units are often referred to as investment centers, profit centers, or cost centers.

Required:

a. Describe the characteristics that distinguish an investment center, a profit center, and a cost center from each other.

b. Discuss how the performance of a manager of each type of center should be evaluated.

c. Define return on investment and residual income and discuss whether or not these measures are appropriate for measuring the performance of managers responsible for each type of center.